California and the West

Northrop, Lockheed post strong quarter

Defense industry fears of a spending slowdown are alleviated by the results of the top two Pentagon contractors.

With little letup in Pentagon spending, the nation's two largest defense contractors reported sharply higher fourth-quarter earnings and raised their profit outlooks for the year.

Century City-based Northrop Grumman Corp., the nation's second-largest weapons developer, said Thursday that quarterly net income rose 37%. The results were fueled by a late-year flurry of contracts for military electronic equipment and federal information technology services.

Earnings climbed to $453 million, or $1.28 a share, from $331 million, or 92 cents, a year earlier. Revenue increased 4.6% to $8.02 billion. The results were better than the $1.26 a share that analysts were expecting, but Northrop shares nonetheless fell 50 cents to $71.30.

"This was a blowout quarter for us," Ronald D. Sugar, Northrop's chairman and chief executive, said in a conference call with analysts. "We ended the year with a record backlog that will provide a strong foundation for growth."

The earnings reports alleviated concern within the defense industry of a spending slowdown. Analysts and executives had worried that the wars in Iraq and Afghanistan could result in funds being drained from the development and acquisition of new weapons.

But that "hasn't happened at all," said Stephen Mader, vice chairman of Christian & Timbers, an executive search firm with close ties to the industry. "Defense guys are feeling and looking good these days. They're looking at extremely strong defense spending for the next few years."

Spending on weapons rose nearly 20% in the fourth quarter, and President Bush is calling for large increases in the Pentagon's fiscal 2008 budget.

Although Democrats, who have taken control of Congress, oppose the Bush administration's Iraq policy, they are expected to maintain military spending so they won't appear weak on defense, analysts said.

Driving the spending will be new threats, including the latest revelation that China had knocked out one of its own weather satellites in a test of an anti-satellite weapon, Sugar said.

"We continue to see bipartisan support for robust levels of defense spending," he said. "For 2007, we are targeting solid earnings growth driven by higher sales" and improving profit margins.

Sugar said Northrop was raising its 2007 earnings forecast from a range of $4.65 to $4.90 a share to $4.80 to $5.05.

Northrop, which makes myriad Pentagon systems including unmanned spy planes, satellites and Navy ships and submarines, also is one of the largest federal contractors for information technology services.

For all of 2006, Northrop posted net income of $1.54 billion, or $4.44 a share, up 10% from $1.4 billion, or $3.83, in 2005. Sales rose to $30.15 billion from $30.06 billion.

Separately, an Air Force spokesman said a key document starting the multibillion-dollar competition for new aerial refueling tankers could be released early next week.

The final request for proposals will outline the Air Force's requirements for the new tankers. In the last two weeks, Northrop executives have been threatening to abandon their bid, based on drafts of the document, which the company says is "stacked" against it.

Northrop, which proposes to convert Airbus A330 jetliners into tankers, has complained that the draft document favors its defense rival Boeing Co., which is considering modifying its 767 or 777 jets into tankers.

Northrop has called for changes in evaluating the competing proposals, but the Air Force has declined to say whether any would be made.

Loren Thompson, a Lexington Institute defense policy analyst, said that according to Air Force officials he has talked to, only slight changes have been made in the document.

Sugar said Northrop would wait for the final document before making a decision. "Our bid decision will be determined by how well our offering aligns with the Air Force's requirement."